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Dynamic effects of consumption tax reforms with durable consumption

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  • Li Qian

    (Key Laboratory of Mathematical Economics (SUFE), Ministry of Education, Shanghai, China)

Abstract

This paper introduces durables into a dynamic general equilibrium overlapping generation model with idiosyncratic income shocks and endogenous borrowing constraints, which depend on durables. The aim of this paper is to evaluate the welfare effects of consumption tax reforms in a richer model that captures the difference between nondurable and durable consumption. When durables are considered, the standard results that a shift to consumption taxes is welfare improving are overturned. The mechanism of this opposing result is that consumption tax makes durable consumption more expensive without relaxing the borrowing constraint. The inability of borrowing to insure against income risk deviates the economy further away from market completeness and particularly hurts young and poor households. As a result, welfare decreases, coupled with negative redistribution.

Suggested Citation

  • Li Qian, 2020. "Dynamic effects of consumption tax reforms with durable consumption," The B.E. Journal of Macroeconomics, De Gruyter, vol. 20(2), pages 1-33, June.
    • Handle: RePEc:bpj:bejmac:v:20:y:2020:i:2:p:33:n:6
    DOI: 10.1515/bejm-2019-0026
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    References listed on IDEAS

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    More about this item

    Keywords

    consumption tax; durable consumption; endogenous borrowing constraint; incomplete markets; transitional dynamics; welfare;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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